A Look at Sponsor-Backed Going Private Transactions

We surveyed 16 sponsor-backed going private transactions announced from January 1, 2014 through December 31, 2014 with a transaction value of at least $100 million (excluding target companies that were real estate investment trusts). The United States transactions that are included in the survey are only transactions that have closed or that are pending. Some of the highlights of the survey included the following:

The number and size of sponsor-backed going private transactions decreased as compared to 2013. The average deal size in 2014 was $2.1 billion ($1.3 billion excluding the two transactions with the largest transaction values), compared with $2.5 billion ($903 million excluding the two transactions with the largest transaction values) in 2013. The total number of going private transactions decreased by 40.7%, from 27 transactions in 2013 to 16 in 2014. Sponsor-backed deal activity was fairly consistent during each quarter of 2014. The decline in going private activity is likely due to relatively high public company valuations in 2014 and increased competition from strategic buyers.

Reverse termination fees appeared in all but one of the debt-financed going private transactions in 2014. The average single-tier reverse termination fee was equal to 6.4% of the equity value of the transaction (5.7% of the enterprise value) and the average company termination fee was equal to 3.6% of the equity value of the transaction (3.1% of the enterprise value), relatively consistent with the average values of 6.8% of equity value for reverse termination fees in 2013 and 3.3% of the equity value for company termination fees in 2013.

The use of go-shop provisions increased in 2014, appearing in 37.5% of going private transactions compared to 26% in 2013. Go-shop provisions have proven to be a useful tool that have appeared in a significant minority of deals over the last several years.

The tender offer construct was used significantly less than in 2013, dropping to 13% of going private transactions in 2014 from 30% in 2013. The decrease of the tender offer construct in 2014 is likely a statistical anomaly due to the relatively small sample size of 16 surveyed transactions.

As was the case in 2013, no sponsor-backed going private transaction in 2014 contained a financing out (i.e., a provision that allows the buyer to get out of the deal without the payment of a fee or other recourse in the event that debt financing is unavailable).

Specific performance “lite” continues to be the predominant market remedy with respect to allocating financing failure and closing risk in sponsor-backed going private transactions. Specific performance lite means that the target is only entitled to specific performance to cause the sponsor to fund its equity commitment and close the transaction in the event that all of the closing conditions are satisfied, the target is ready, willing, and able to close the transaction, and the debt financing is available.

We have continued to see a decrease in the use of some of the financial-crisis-driven provisions, such as the sponsors’ express contractual requirement to sue their lenders upon a financing failure. Most of the acquisition agreements entered into in connection with the 2014 surveyed transactions are silent on the requirement that sponsors sue their lenders upon a financing failure; however, even when the agreements are silent, the sponsor may be required to use its reasonable best efforts to enforce its rights under its debt commitment letter, which could include suing the lender.